PE Investors accuse Lilliput of fudging funds

Friday, 28 October 2011

Lilliput Kidswear has decided to defer its IPO plan after PE investors Bain Capital and TPG accused founder Sanjeev Narula of fudging company accounts. Narula in turn has taken the matter to the High Court alleging that investors want to put an end to the company’s RS 850 crores IPO to gain maximum control in their hands. In the wake of this development Matthew Levin and Scott Gilbertson, the four independent directors and the statutory auditor – S R Batliboi have resigned. The eight-member board also included Narula and the company’s CFO Arun Jain.

Lilliput’s board approved the IPO on September 23 and it was scheduled to file the draft red herring prospectus with market regulator SEBI by the end of last month. Three days later, both the investors communicated to Narula stating that they have doubts about the company’s accounts being fudged and that they wish to get an independent audit done. Lilliput refused this demand saying the two PE investors already had access to their monthly profit/loss accounts, inventory level, unsold stock and store expansion plans.

At present, Narula owns a 55 per cent stake in the company with the PE investors holding the rest. Lilliput approached the Delhi High Court on October 3 to prevent the PE investors from selling their stake. The court has granted Lilliput injunction. Bain and TPG are yet to file their responses in the matter. Bain Capital has invested in Lilliput through BC India, while TPG owns the stake through Star Market Asia.

Now the company has decided to raise Rs 900 crores through Plan B. According to them the valuation is an issue that could be settled and would depend on response the road shows get. Started in 1991 as a supplier to some large retailers, Lilliput forayed into direct retailing with a store in Delhi in 2003. After Bain Capital and TPG came on board in April 2010, the company changed its retail strategy and increased the size of its stores from 1,000 sq. ft. to 7,000-8,000 sq. ft. It has also added around 100 stores (25 under construction) and over 6 lakh sq. ft. of retail space since April. Due to aggressive expansion strategy, company’s debt level touched over Rs 500 crores and the proposed IPO was very important for it to pay back dues and undertake further expansion.